History tramples the weak -- but State Street (NYSE: SST ) , founded in 1792, remains sturdy. It has grown earnings per share every year for the past 28 years, and the fourth-quarter results it announced yesterday only added to that record.
State Street announced 2006 fourth-quarter earnings per share of $0.86, on net income of $291 million, a 16% increase over 2005's fourth-quarter results. For full-year 2006, revenues increased 15% to a record $6.35 billion, compared to 2005. 2006 net income rose 14% to $1.1 billion. Return on shareholders' equity from continuing operations in 2006 was 16%, up from 15.3% in 2005.
Results were driven by double-digit growth in every major revenue source at State Street. Nearly 40% of State Street's total revenues come from servicing fees. Assets under custody, which grew 17% to a record $11.85 trillion in fourth-quarter 2006, drive these fees. State Street is also the world's No. 1 investment manager of institutional assets. Assets under management, which grew 21% to a record $1.7 trillion in Q4 2006, drive these fees. State Street also earns more than a billion dollars a year in revenue from managing its net interest margin. The firm's net interest margin improved by 18 basis points in Q4 2006, compared to 2005.
Expense control stayed solid in the quarter, with operating expense increases lagging revenue growth by two percentage points.
State Street is well-positioned against several growth trends in the investment services and management industries. First, State Street's international operations produce roughly 40% of earnings, with management aiming to increase that figure to 50%. Outsourcing of its middle- and back-office operations continues to grow, especially in Europe, but State Street shouldn't have trouble with this trend. Second, State Street's investment management arm, State Street Global Advisors, specializes in high-margin investment management strategies such as enhanced index and absolute returns. (The company was the original developer of exchange-traded funds.)
Again and again, State Street has proven that a seemingly boring business can still be beautiful.
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